Paid or Free? The Manufacturer's Revenue Strategy in Response to the Developer's Entry in Technology Platform Market

Abstract

Platform-hardware business models bring an increasing popularity by integrating technology platforms designed by developers with suitable hardware devices produced by original equipment manufacturers (OEMs). This study examines an OEM's strategic choice of revenue models in response to a developer's entry threat when facing consumers with two-dimensional valuation for the product: the technology platform and the device. The OEM has two options of the revenue model: wholesale model in which the developer charges a wholesale price for each installation of the technology platform when the OEM does not preinstalls the developer's core services, and revenue sharing model in which the OEM freely accesses the technology platform after preinstalling the services, and the developer determines whether to enter the market, thus creating a coopetition with the OEM. We find that when the revenue sharing percentage is low or service margin is low, the OEM will choose the revenue sharing model and the developer will enter the market for a low entry cost. When the service margin is moderate, the OEM prefers the wholesale model. When the revenue sharing percentage and service margin are high, the OEM will choose between the two models depending on the developer's entry strategy. Specifically, the OEM will prefer the revenue sharing model when the developer enters but favor the wholesale model when the developer does not enter. In addition, the developer benefits from the OEM's choice of wholesale model but is harmed by the OEM's choice of revenue sharing model, regardless of entering the market or not. The extended cases of hardware device and technology platform compatibility and correlation, consumer's customization of core services preinstallation diversify the interplay between the OEM and developer, and verify the robustness of the basic model.